March 30, 2023 | Maria Fritzsche
Estimated reading time: 4 minutes
What is STIFC?
The popularity of short-term interest-free credit (STIFC) has skyrocketed over the past decade. But as a new and little-regulated financial service, consumers are left exposed to spiralling into long-term debt. The FCA hopes to change this landscape and protect the public with new rules and regulations on STIFC.
What is short-term interest-free credit?
Short-term interest-free credit (STIFC) is the umbrella term for temporary loans that are limited in their maximum value. The money is typically lent over a period of 30-60 days, but this could be extended to as much as three or six months.
Interest-free, of course, means that there’s no extra cost to the customer. Instead, the provider typically earns revenue by taking a commission of the sales total they are enabling.
There are a few different types of STIFC agreements. Some examples include:
- Buy Now, Pay Later (BNPL products)
- 0% purchases credit cards
- Interest-free balance transfer credit cards
- Arranged overdrafts
- Repayment holidays
Each of these forms of credit agreement has different conditions and varying levels of accessibility. There’s no current standardisation for merchants across the industry, resulting in a general consumer detriment. Even so, since getting an agreement for credit products is so frictionless that short-term interest-free credit is attracting a huge audience at the moment.
Relationship between STIFC and BNPL
Buy now, pay later is one arm of the entire STIFC umbrella. They are typically seen as the most easy-access type of loan available, since consumers can ‘qualify’ as they checkout on an online shop.
As the most popular category of third-party lender, BNPL firms are certainly at the forefront of the changing lending practice landscape. But with little in the way of affordability checks or credit broking rules that regulated credit firms are held to, there’s a clear need for FCA regulation.
Four of the most popular BNPL lenders are Klarna, ClearPay, OpenPay and Laybuy. They were each involved in a consultation by the UK government recently in February 2022.
Although the scope of this consult only targeted BNPL providers – the government has since recognised that expanding any rules to the entire STIFC industry would be a better move.
On the 20th June 2022, the Financial Conduct Authority announced incoming regulations for short-term interest-free lenders.
The major aim is to protect consumers against the largest complaint around STIFC; that they are too easy to attain for customers who are not properly informed. As such, many who opt for short-term interest-free loans end up getting into unintentional long-term debt. Newly regulated agreements should prevent this potential consumer detriment.
A regulated credit agreement is expected to increase friction, ensure each BNPL provider acts fairly, and introduce rules around advertising.
What are the proposed rules?
At the moment, the regulatory perimeter is not yet clear but between the original draft legislation and secondary legislation. But we’ve got a good idea about 7 key areas of change coming for short-term interest-free lenders. Here is a small summary of each change:
- UK Financial Services Marketing Rules will apply to ensure advertisements are fair, clear and financial promotions do not mislead consumers
- Prescribed forms will be introduced (similar to those under the National Security and Investment Act 2021) in order to introduce friction into the process and make BNPL harder to obtain
- Lenders will be required to make pre-contractual disclosures in their BNPL agreements (similar to the statutory disclosures found in the Consumer Credit Act 1974)
- Credit agreements will not be enforceable if prescribed forms are not present
- How firms determine creditworthiness must become more robust and thoughtful (it’s likely this will combine with Consumer Duty so that open banking connections will facilitate better file sharing from credit agencies)
- Customers who end up defaulting on their STIFC agreements must be treated fairly
- The Financial Ombudsman Service will be extended to STIFC products to increase consumer protection
Who must comply?
The FCA rules around STIFC regulations are expected to start being enforced from mid-2023 to early 2024.
It is likely to apply to BNPL credit providers, third-party lenders, direct short-term lenders, credit reference agencies and potentially those in the wider credit or payment industries.
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